Written by Peter S. Goodman
This past week brought home the magnitude of the overlapping crises assailing the global economy, intensifying fears of recession, job losses, hunger and a plunge on stock markets.
At the root of this torment is a force so elemental that it has almost ceased to warrant mention — the pandemic. That force is far from spent, confronting policymakers with grave uncertainty. Their policy tools are better suited for more typical downturns, not a rare combination of diminishing economic growth and soaring prices.
Major economies including the United States and France reported their latest data on inflation, revealing that prices on a vast range of goods rose faster in June than anytime in four decades.
Those grim numbers increased the likelihood that central banks would move even more aggressively to raise interest rates as a means of slowing price increases — a course expected to cost jobs, batter financial markets and threaten poor countries with debt crises.
On Friday, China reported that its economy, the world’s second-largest, expanded by a mere 0.4% from April through June compared with the same period last year. That performance — astonishingly anaemic by the standards of recent decades — endangered prospects for scores of countries that trade heavily with China, including the United States. It reinforced the realization that the global economy has lost a vital engine.
The spectre of slowing economic growth combined with rising prices has even revived a dreaded word that was a regular part of the vernacular in the 1970s, the last time the world suffered similar problems: stagflation.
Most of the challenges tearing at the global economy were set in motion by the world’s reaction to the spread of COVID-19 and its attendant economic shock, even as they have been worsened by the latest upheaval — Russia’s disastrous attack on Ukraine, which has diminished the supply of food, fertilizer and energy.
“The pandemic itself disrupted not only the production and transportation of goods, which was the original front of inflation, but also how and where we work, how and where we educate our children, global migration patterns,” said Julia Coronado, an economist at the University of Texas at Austin, speaking this past week during a discussion convened by the Brookings Institution in Washington. “Pretty much everything in our lives has been disrupted by the pandemic, and then we layer on to that a war in Ukraine.”
It was the pandemic that prompted governments to impose lockdowns to limit its spread, hindering factories from China to Germany to Mexico. When people confined to home then ordered record volumes of goods — exercise equipment, kitchen appliances, electronics — that overwhelmed the capacity to make and ship them, yielding the Great Supply Chain Disruption.
The resulting scarcity of products pushed prices up. Companies in highly concentrated industries from meat production to shipping exploited their market dominance to rack up record profits.
The pandemic prompted governments from the United States to Europe to unleash trillions of dollars in emergency spending to limit joblessness and bankruptcy. Many economists now argue that they did too much, stimulating spending power to the point of stoking inflation, while the Federal Reserve waited too long to raise interest rates.
Now playing catch-up, central banks like the Fed have moved assertively, lifting rates at a rapid clip to try to snuff out inflation, even while fueling worries that they could set off a recession.
Given the mishmash of conflicting indicators found in the American economy, the severity of any slowdown is difficult to predict. The unemployment rate — 3.6% in June — is at its lowest point in almost half a century.
But anxiety over rising prices and a recent slowing of spending by American consumers have enhanced fears of a downturn. This past week, the International Monetary Fund cited weaker consumer spending in slashing expectations for economic growth this year in the United States, from 2.9% to 2.3%. Avoiding recession will be “increasingly challenging,” the fund warned.
The pandemic is also at the centre of the explanation for China’s unnerving economic slowdown, which will probably extend shortages of industrial goods while limiting the appetite for exports around the world, from auto parts made in Thailand to soybeans harvested in Brazil.
China’s zero-COVID policy has been accompanied by Orwellian lockdowns that have constrained business and life in general. The government expresses resolve in maintaining lockdowns, now affecting 247 million people in 31 cities that collectively produce $4.3 trillion in annual economic activity, according to a recent estimate from Nomura, the Japanese securities firm.
But the endurance of Beijing’s stance — its willingness to continue riding out the economic damage and public anger — constitutes one of the more consequential variables in a world brimming with uncertainty.
Russia’s offensive in Ukraine has amplified the turmoil. International sanctions have restricted sales of Russia’s enormous stocks of oil and natural gas in an effort to pressure the country’s strongman leader, Vladimir Putin, to relent. The resulting hit to the global supply has sent energy prices soaring.
The price of a barrel of Brent crude oil rose by nearly a third in the first three months after the invasion, though recent weeks have seen a reversal on the assumption that weaker economic growth will translate into less demand.
Germany, Europe’s largest economy, relies on Russia for nearly a third of its natural gas. When a major pipeline carrying gas from Russia to Germany cut the supply sharply last month, that heightened fears that Berlin could soon ration energy consumption. That would have a chilling effect on German industry just as it contends with supply chain problems and the loss of exports to China.
If Germany loses complete access to Russian gas — a looming possibility — it would almost certainly descend into a recession, say economists. The same fate threatens the continent.
“For Europe, the risk of a recession is real,” Oxford Economics, a research firm in Britain, declared in a report this past week.
For the European Central Bank — which next gathers on Thursday to much apprehension in markets — the prospect of a downturn further complicates an already wrenching set of decisions.
Ordinarily, a central bank ministering to an economy sliding toward recession lowers interest rates to make credit more available, spurring borrowing, spending, and hiring. But Europe is confronting not only weakening growth but also soaring prices, which customarily calls for lifting rates to snuff out spending.
Raising rates would support the euro, which has surrendered more than 10% of its value against the dollar this year. That has increased the cost of Europe’s imports, another driver of inflation.
Adding to the complexity is that the usual central banking tool kit is not built for this situation. Navigating the balance between protecting jobs and choking off inflation is difficult enough in simpler times. In this case, rising prices are a global phenomenon, one amplified by a war so far impervious to sanctions and diplomacy, combined with the mother of all supply chain tangles.
Neither the Fed nor the European Central Bank has a lever to pull that forces action from Putin. Neither has a way to clear the backlog of container ships clogging ports from the United States to Europe to China.
“Everyone following the economic situation right now, including central banks, we do not have a clear answer on how to deal with this situation,” said Kjersti Haugland, chief economist at DNB Markets, an investment bank in Norway. “You have a lot of things going on at the same time.”
The most profound danger is bearing down on poor and middle-income countries, especially those grappling with large debt burdens, like Pakistan, Ghana and El Salvador.
As central banks have tightened credit in wealthy nations, they have spurred investors to abandon developing countries, where risks are greater, instead taking refuge in rock-solid assets like U.S. and German government bonds, now paying slightly higher rates of interest.
This exodus of cash has increased borrowing costs for countries from sub-Saharan Africa to South Asia. Their governments face pressure to cut spending as they send debt payments to creditors in New York, London and Beijing — even as poverty increases.
The outflow of funds has pushed down the value of currencies from South Africa to Indonesia to Thailand, forcing households and businesses to pay more for key imports like food and fuel.
The war in Ukraine has intensified all of these perils.
Russia and Ukraine are substantial exporters of grains and fertilizers. From Egypt to Laos, countries that traditionally depend on their supplies for wheat have suffered soaring costs for staples like bread.
Around the globe, the ranks of those considered “acutely food insecure” have more than doubled since the pandemic began, rising to 276 million people from 135 million, the UN World Food Program declared this month.
Among the biggest variables that will determine what comes next is the one that started all the trouble — the pandemic.
The return of colder weather in northern countries could bring another wave of contagion, especially given the lopsided distribution of COVID vaccines, which has left much of humanity vulnerable, risking the emergence of new variants.
So long as COVID-19 remains a threat, it will discourage some people from working in offices and dining in nearby restaurants. It will dissuade some from getting on aeroplanes, sleeping in hotel rooms or sitting in theatres.
Since the world was first seized by the public health catastrophe more than two years ago, it has been a truism that the ultimate threat to the economy is the pandemic itself. Even as policymakers now focus on inflation, malnutrition, recession and a war with no end in sight, that observation retains currency.
“We are still struggling with the pandemic,” said Haugland, the DNB Markets economist. “We cannot afford to just look away from that being a risk factor.”